You know a trend is peaking when it feels like every big corporation is suddenly jumping on board in a bid to appeal to new customers. Usually, that also means the trend is about to jump the shark.

It's why conglomerates trying to act hip would often be better served to stay in their lanes. Teens can spot authentic and organic a mile away -- and the inauthentic, they can spot from even farther.

Woman hold box of clothes

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What goes around, comes back around

In the apparel retail world right now, the hot segment everyone is attempting to jump into is secondhand clothing. ThredUp (TDUP -1.19%) expects the used resale niche to become a $36 billion market this year, and forecasts that it will more than double to $77 billion by 2025, a 21% compound annual growth rate.

A growing number of teens are conspicuously aware of the impact their fashion choices have on the environment, and the circular economy that seeks to reduce waste and the use of resources resonates with them.

Yet there's also a disconnect between teens' environmental consciousness and their embrace of fast fashion, which consumes more resources, as those clothes are meant to essentially be disposable. Fast fashion eschews classics with staying power for on-trend styles that lead to quick turnover in wardrobes.

It's just such turnover that has helped fuel the rise in the resale business, which ThredUp contends will be the primary driver of the secondhand clothing market. Resale is forecast to grow threefold in the next four years, from $15 billion to $47 billion, while the traditional thrift and donation market will expand at a slower rate from $21 billion to $30 billion.

Woman sorting clothes in bin

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Everyone wants in

Resale is now a highly competitive space, with newer entries such as Poshmark (POSH) and the RealReal (REAL 5.27%), and legacy contenders such as eBay and Mercari. But now, every retailer considers itself a reseller, too. 

ThredUp at one point operated three brick-and-mortar stores. But it permanently closed them during the pandemic, and is now strictly an e-commerce play. However, in 2018, it began preparing for that possibility by developing what it calls a resale-as-a-service (RaaS) offering that allows major chains to offer its used clothes. Walmart, Macy's, and J.C. Penney are just some of its big retail partners.

Other retailers are striking out on their own. Etsy, for example, just acquired Depop for a whopping $1.6 billion, Levi Strauss launched Levi Secondhand, lululemon athletica and Nike opened their own e-commerce outlets, and even Gucci recently opened a high-end e-commerce consignment store.

According to ThredUp's report, 60% of retailers say they are already offering secondhand clothes to their customers or are open to the possibility of doing so.

After the disastrous year apparel retail just had, it's understandable why these companies want to glom onto the next hot trend, yet a lack of authenticity is likely going to make it more difficult for any of them to succeed.

And because the big retailers will doubtless treat resale as only a secondary source of revenue and customers, those projections for meteoric growth might not pan out.

Woman looking at clothes on a rack

Image source: Getty Images.

A threadbare opportunity

Here are four reasons why the resale market might not be as viable a business as it appears, even though there is certainly a segment of the market for whom used clothes are appealing. 

  • Cannibalization. For the retail behemoths, offering a robust lineup of cheap used clothes risks cannibalizing sales of their full-price apparel. Consider how a number of retailers once put a lot of effort into growing secondary strings of outlet stores -- until they eventually realized that their off-price outlets were undercutting sales and brand value at their full-price locations -- and creating profitability problems. The used clothing business has similar potential.
  • Lack of inventory. The more retailers that enter the market, the more they will be competing for a limited amount of quality inventory. 
  • Disposable fashion. Fast fashion's popularity means many of the clothes that are sitting in closets may not be durable enough to last for a second owner, and they're likely to have already fallen out of fashion. 
  • Costly operations. The business of sorting, cleaning, prepping, and marketing for sale someone else's clothing is labor-intensive and expensive. Also, most retailers aren't equipped to handle the logistics of buying secondhand clothing.

Most of the leaders in the resale segment are not profitable. ThredUp reported first-quarter revenue that was up 15% year over year to $55.6 million. That was a record for the company, but it still booked an adjusted loss of $9.1 million for the period. The RealReal saw a 27% gain in total revenue to $98.8 million, but its adjusted EBITDA was a loss of $35.6 million. 

Poshmark's earnings did turn positive on an adjusted basis from the year-ago period, but investors will have to wait to find out if that was a one-off event.

Pricey retreads

Last year, the pandemic left people a bit more wary of wearing other people's used clothing, and while that skittishness might fade as a sense of normalcy returns, the straight-line rise in secondhand apparel sales that has been predicted might not pan out.

Ultimately, the companies that dominate this niche are  consumer goods players, even if the market is valuing them more like software companies. ThredUp trades for 13 times sales, Poshmark for 12 times sales, and The RealReal at almost 6 times sales. And given that analysts are still forecasting losses for the year for all three of them, those are expensive retail stocks.

Although for traditional retailers, partnering with an existing reseller is seen as the best solution for dealing with the problems resale creates, investors might be better off watching these stocks from the sidelines until there's a bit more clarity as to whether this fashion trend has legs or is just the latest fleeting fad.